Credit and Funding: What's the Difference?

Starting a business is hard if you're not financially prepared. Covering startup costs is a challenge, so you need to understand your funding and credit options. Not everyone is born into wealth. We start businesses for a practical reason: to earn money, and earning money takes money to invest. Here's how business credit and business funding differ and how each helps you run your business with less worry.

What is business credit?

Business credit is your company's ability to buy what it needs now and pay later. It's your borrowing capacity. The higher your credit rating, the better your chances of borrowing when you need to.

To grow your rating, open commercial credit lines. Being active in credit transactions and paying on time strengthens your position as a borrower. You can open installment accounts, revolving accounts and vendor agreements.

What is business funding?

Funding is broader. It covers every way your business finances a specific need, project or program, usually by bringing in capital from outside sources. Funding includes, but isn't limited to, government grants, loans, investors and self-organized funding programs. These sources can also become partners that expand your network. A worthwhile funded project should return more than it costs.

The key differences

Think of it as loans (funding) versus a line of credit (credit). Loans are usually borrowed as a lump sum for a specific purpose. A line of credit has a borrowing limit, can be used again and again, and isn't tied to one purpose. Both cost interest. With a loan, interest starts right after you borrow. With a line of credit, interest applies only when you draw funds. Some lines carry annual fees, though banks sometimes waive them.

Both help businesses manage risk and fund growth. Whatever you choose, have a plan. Before you take a loan or a line of credit, forecast your ability to repay it when it comes due.

Want help choosing the right option? Book a Strategy Call with Dr. Eukeethia B.